By Beth Carroll, The Cygnal Group

I often tell my clients that the good news about incentives is they work…but the bad news about incentives is…you guessed it, they work. What this means is you need to be very careful how you design your incentive plan or you just might end up dealing with some unexpected consequences, and possibly paying out more than you intended, or worse, getting no measurable return (or negative return!) for dollars you are spending.

There are many books written on the topic of sales compensation and most of them are long, technical, and have examples that are not especially relevant to the logistics industry. In this article you will learn the basics necessary for developing well-thought out incentive plans for logistics companies. There are six high level task categories for incentive design, and they should be tackled in this order (it is easy to get the cart before the horse, and start talking about pay frequency or commission versus bonus BEFORE you’ve even established your business objectives, but this can lead to confusion and yelling among the design team members, so it’s best if you just take it one step at a time):

1. Define your business objectives & sales strategy
2. Define your selling roles and determine incentive plan eligibility
3. Establish total compensation, pay mix & leverage for each role
4. Determine the appropriate performance measures & weights
5. Develop the plan mechanics, including optimum pay frequency, and
6. Develop a thorough and comprehensive implementation plan.

1. Define your business objectives and sales strategy. You don’t start off on a trip with no idea where you are headed, nor should you develop an incentive plan without an idea of what you want it to accomplish. An incentive plan is a powerful tool that should accomplish far more than simply delivering pay to your people. Spend some time with your leadership group developing a clear business plan, with defined objectives, and then figure out the appropriate sales strategy to help you accomplish these objectives. For some logistics companies this may be targeting large contracted business relationships, whereas for others is may be maximizing volume on low margin commodity freight. The sales strategy for these two extremes is of course, quite different, and would require a different skill set (and incentive plan) for the types of reps going after the business.

2. Define your selling roles and determine incentive plan eligibility. Once you have your sales strategy defined, you need to determine what roles will best support this strategy. What are the characteristics of these roles – are they primarily hunters or farmers? Are they selling transactionally where they are providing a low cost solution to a customer who wants minimal hassles or are they selling consultatively where they are crafting a custom solution to suit a particular business need? The transactional hunter has a very different profile (typical van freight broker) than the consultative farmer (the account manager for a multi-million dollar outsourced logistics contract) and they should not have the same incentive plan. You may have a large game hunter who finds the multi-million dollar account but who then hands it to the account manager to grow and develop. These also are different roles. One of the most frustrating things for sales people is to not have a clear understanding of what their role is and what is expected of them, so this is an absolutely crucial step in the process of developing incentive plans. As for eligibility, a common mistake in logistics companies is to attempt to develop incentive plans for everyone in the organization. Customized incentive plans are a powerful tool that must be carefully managed. They take money, time, and effort to get them right. I’ve seen too many companies burn too much of each in an attempt to develop and calculate customized incentives for all of their people. Customized incentives should be used only for roles that have a direct and measurable impact on business results. If you find yourself trying to pay someone for accomplishment of something that really doesn’t impact the bottom line – stop! If you find yourself trying to pay someone for something they have no direct impact on or which is not measurable – stop! Customized incentives should be used for these types of roles in logistics: broker, assistant broker, dispatcher, load coordinator, driver or carrier manager, sales or branch or terminal manager, team leader, operations manager, outside and inside sales rep, and account manager. Generally, with few exceptions, other roles should be on a corporate plan which payouts annually based on overall company results.

3. Establish total compensation, pay mix and leverage for each role. Here’s where the TIA survey comes in very handy. By matching your defined roles to the roles in the survey, you can determine how much (salary plus incentives) you should be paying at 100 percent performance. Some companies establish a philosophy of market 50th for base salary, but market 75th for total compensation. This strategy would help attract and retain top performers. Your business objectives should help inform your compensation philosophy. Pay mix is the amount of pay coming from salary, and the amount of pay coming from incentives as a percent of total compensation. A 50/50 pay mix means equal amounts come from salary as from incentives. For most farmer-type roles, the pay mix should be skewed more toward base salary (70/30 or 80/20, for example), whereas most hunter-type roles should be skewed more toward incentives (40/60 or 50/50, for example). While role plays an important part in this decision, so does company philosophy. Some companies are by nature more aggressive than others, while some are more team oriented. More aggressive means more emphasis on incentive pay. More team oriented means more emphasis on base salary.

Leverage is the amount of upside. It’s what happens when someone does a really good job. Typically you want there to be more upside the more pay is at risk. As a general rule of thumb, plans with 80/20 pay mixes have 2.0 leverage (2 times the target incentive is earned for a really good job), whereas 50/50 pay mix plans may have 3.0 leverage (3x the target incentive is earned for a really good job). These are not hard and fast rules, but guidelines. What’s most important is relativity within your company. If your 80/20 plans have 1.5 time leverage, then maybe your 50/50 plans will only be 2.5 times. Lack of leverage is the NUMBER ONE mistake being made by logistics companies. If you use a straight commission, by definition there is no leverage. Someone must double their volume to double their pay. This is next to impossible. Likewise, any quota bonus plan that pays 101 percent of incentive at 101 percent performance is doing the exact same thing, and it’s incorrect. The ratio should increase above 100 percent performance to 1.5, 2.0 or greater multiples, so that for example, 103 percent of incentive is paid out at 101 percent of performance. But be careful – you can’t continue this forever. You will need to decelerate the payout curve at some point above goal or you could end up paying out far more in incentives than you ever intended.

4. Determine the appropriate performance measures & weights. One of the best moments I have with any client is the “ah ha” moment when they realize they can do far more with an incentive plan than they ever realized — when they realize that it’s not a question of mutually exclusive choices, but of crafting a system that incorporates different parts of their business strategy. The first taste of this comes with the selection of performance measures. A performance measure must be objective, relevant, controllable, and measurable. The best measures are often found on your income statement or in your business plan or sales strategy. Common performance measures in logistics are: gross margin dollars (net revenue), revenue, line-haul, operating income, gross margin percentage, number of new customers, number of loads, safety, on-time percentage, driver retention, closed leads, renewed contracts, and customer satisfaction.

The Design Team’s task is to consider for each role which are the best performance measures for that role. The answer should be different for hunters vs farmers, and for managers vs line staff. You want to start by casting a wide net and thinking about all the potential measures for each role. Some will not work because you can’t measure them (customer satisfaction often falls into this category), others will not work because they are not controllable by the individual and may need to be pushed up to higher levels of management (operating income is a good example, as it may be fine for a branch manager, but probably not for a broker).

The second step is to consider scope. Scope is the level of measurement selected, such as individual, team, region, or company. When you combine scope with performance measure, you have created your first plan element. Once you have tentative list of elements, you need to assign weights to them. The weights must add to 100%. For example, if your broker role has a target incentive of $20,000, you might use 3 elements weighted as follows: individual gross margin 50%, individual new customers acquired 30%, region gross margin 20%. A broker would earn $10,000 for individual gross margin at target performance, $6,000 for new customers, and $4,000 for region gross margin. What if you’d also really like to include gross margin percentage and on-time percentage, but they aren’t important enough to assign a full piece of the incentive plan to? You can use these types of measures as qualifiers (a minimum requirement for payout under another element) or modifiers (a way to increase or decrease payout under another element), but be careful not to over-complicate the plan. The KISS rule most definitely applies to sales compensation design. Try to limit your weighted elements to no more than 4, with no more than 1 modifier or qualifier on the most important elements, and no less than 20% weight per element.

5. Develop the plan mechanics, including optimum pay frequency. Once you have your elements selected and weighted, you need to figure out how you are going to calculate pay (mechanics) and how often you are going to deliver pay (frequency). There are two fundamental approaches to calculating incentive compensation, and the terms used to describe them are widely misused and misunderstood. They are “commission” and “goal-based bonus.” When you are talking about a sophisticated incentive plan design, these terms mean something very specific. A commission is a way to deliver incentive pay that pays a piece of the action, such as a % of gross margin or % of revenue. Commission-based plans pay based on volume alone – those who sell more make more. The other end of the spectrum is a goal-based bonus based plan, which pays for goal attainment. A goal-based bonus is not subjective or arbitrary, but instead is tied to attainment of a pre-defined goal. (We strongly discourage the use subjective bonuses, by the way). If Sally has annual volume of $500,000 and Joe has annual volume of $250,000, then under a commission-based plan Sally will make 2x a much as Joe. However, many managers will understand that perhaps Sally has 2x the volume because she has been given house accounts or contracted business, or something that makes it unfair for her to earn 2x as much as Joe (who may be working his fanny off building a new line of business or breaking into new lanes). In this case a goal-based bonus plan would level the playing field. Under a goal-based plan, Sally would earn the same amount at 100% of her assigned goal as Joe would earn at 100% of his assigned goal. Yes, if you were to calculate the rate (pay divided by volume), they would have different payout rates, but by structuring the plan this way you are acknowledging that some business is harder to get than others, and paying accordingly. You can also combine the two approaches and use a goal-based commission, whereby the rate paid below goal is less than the rate paid above goal. A good rule of thumb is that a commission approach will work if everyone is starting from the same place and has the same opportunity (this doesn’t mean a commission is the right approach, just that it is a reasonable alternative to consider). If there are inherent differences in assigned accounts, in ability, or in support, then you might want to consider integrating a goal-based bonus approach.

One of the nice things about using multiple elements in a plan design, is each element can have a different pay frequency. In the example above, you may choose to pay the first element monthly, the second element quarterly, and the third element annually. The main considerations for pay frequency are alignment with business cycle and amount of pay delivered. If the annual target for an element is $1,200 then you probably don’t want to pay monthly as the amount after tax would hardly be enough to go out to dinner. You want to be sure the check received will be meaningful.

6. Develop a thorough and comprehensive implementation plan. You don’t want to go through all the trouble of developing a great incentive plan only to have no one understand it, so be sure to allow plenty of time to communicate (over and over) the new plan design. These steps show a typical communication plan:

1. High level power point presentation to the managers (review their plan first, and then explain their staff’s plan)

2. High level communication to the staff as a group (one off communications only lead to misinformation). Ask them questions and have them reiterate key parts of the plan back to you.

3. Provide plan documents (see my article in the March Logistics Journal for more info on plan docs), so they have the full legal wording necessary to understand and abide by the plan rules. Give them a chance to ask questions in a one-on-one setting.

4. Give them quota or goal sheets which show how much pay is earned at different levels of performance.

5. Track their performance throughout the pay period, there should be no surprises.

6. Give them individual performance reports to go along with their incentive checks so they understand exactly why their pay was what it was.

These steps for plan design are the outline, but it is only a starter map, as the combinations of elements and mechanical design choices are truly limitless, which is what makes designing plans so much fun and why there is truly no correct answer to the question “what is the right plan design for a broker in the 3PL industry.” The only right answer is the one that is right for you.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

By Beth Carroll, The Cygnal Group

What’s wrong with the traditional, “highly variable, straight commission on margin” approach for paying your employees? Nothing…if every employee has the same opportunity, the same skills, the same training, and all your freight is from the spot market where each day is a new day and no one knows for sure what’s coming their way.

However, as this industry matures, many transportation brokers are learning that the traditional approach is no longer working for them. This is especially true in organizations with substantial business from contracted or long-standing “house” accounts or those experimenting with non-traditional organization structures (such as using strategic account managers, strengthening the use of outside selling roles, and/or splitting their organization between teams of “freight finders” and “truck finders”, who may or may not be tied together in shared dependency).

The challenge that arises in these situations is to determine what is “fair”. If you use a highly variable plan delivered via a flat commission rate, is it fair to pay an employee the standard commission rate for moving freight for a large contracted account they didn’t land? What about for freight that is generated by an outside sales person – shouldn’t there be a reduced rate on these loads when it comes to paying the truck finder? What about if you are using a team approach that generates a shared pool, but now you need to add people to the team? Or you need to move your best team leader to another group that is substantially smaller because you know he/she will be able to grow it? It each case, if you stay wedded to using a highly variable commission-only approach, you will find yourself creating “special deals” where certain accounts are paid a lower (or higher) rate than others, where you are administering cumbersome calculations to deduct the “lead generation” fee before calculating the commission, and where you are creating temporary “deals” with employees as you re-organize your staff or your accounts. You may find yourself spending more time trying to remember the different compensation arrangements you have for Joe, Sally and Fred and what the rates are for accounts A, B and C than you are spending building your relationships with your customers.

Using the traditional highly-variable straight-commission approach for incentive compensation is appealing on many levels: it’s simple, easy to understand, it’s economically “pure” so you don’t have to worry that you’re going to spend all your profits on incentives, and it’s easy to administer (at least at first). For busy business leaders, this approach feels like it should be a “fix it and forget it” solution. In addition to these benefits, the commission mechanic (regardless of how much pay is at risk in the plan) is a powerful tool that creates an intensity of focus you generally don’t find with other compensation mechanics. For these reasons, using a highly variable pay plan, with a commission mechanic to calculate pay, is perfectly appropriate for some selling roles and in some selling situations, especially pure new business hunters in start-up companies or high growth divisions of established companies. These types of roles have what is called “high prominence” – which means, in plain language, that they have a high degree of control over the outcome of their sales efforts. (I would still suggest using an escalating or de-escalating commission mechanic for even these roles, however, as it’s rarely appropriate or advisable to base an entire incentive plan on a single, unchanging commission rate.)

Where the traditional highly-variable commission-based approach does NOT makes sense, however, is for companies that have developed a substantial book of regular business, are building strong brand awareness in the marketplace, and are using multiple internal resources to land and grow accounts. In these cases, most of the employees are “less prominent” in the sales process; they are a cog in a much larger wheel that includes marketing and advertising campaigns, outside sales resources, and long-standing company relationships with customers. Using the traditional approach can hinder management from making the right changes for their business (shifting customers or load volume around) because it would be “taking pay” away from one employee and “giving it” to another. In these circumstances, the better approach is to shift your pay mix more toward base salary (at least 50/50), and make at least part of the incentive plan dependent upon the attainment of defined goals.

What is a Goal-Based Incentive Mechanic (aka “Bonus”)?
Commissions pay for volume (“the more you sell, the more you make”). Goal-based bonuses pay for attainment of a pre-defined goal (“if you beat your goal, you make more money”). Using goal-based incentive mechanics can provide more flexibility for managers to run their business to meet customer needs, target strategic objectives beyond gross margin, and manage employee pay as a motivational tool.

An example might help illustrate the difference.

Joe, who has been given a large volume of mainly long standing accounts, generates $30,000 in a given month in margin. This is down 25% from what he did the last month.

Sally, who is still developing her book of accounts, generates $15,000 this month, which represents 150% growth over what she did the last month.

A pure commission mechanic would pay Joe twice as much as Sally, even though his business is shrinking and hers is growing. Arguably, Sally is doing a better job than Joe, even though, and I can hear many of you saying it, “Joe is still bringing more money into the company.” Yes, he is. But, once a company grows beyond the point of living hand-to-mouth in start-up mode, management needs to think strategically in terms of what behaviors and results should be rewarded for the long-term growth of the company. Sally could very well be a better long-term asset, but she may not stay around too much longer if her pay is below market competitive levels (and also very likely perceived by her as being “not fair” compared to what “that slouch, Joe” is making).

Using a pure bonus mechanic, Joe might be given a monthly goal of $35,000 per month in margin, and Sally given a goal of $12,500. Management would make this determination based on previous period performance, opportunities for growth, and the overall numbers which must be hit by the organization. At 100% of goal, each would make $1,000 for the month. A well-designed goal-based plan has a range around goal (called a performance range) which allows for payout both below and above goal, with different escalation rates. At $30,000, Joe would be at 85% ($30,000 / $35,000) of his goal, and he might be paid 77.5% of his target incentive or $775. At $15,000, Sally would be at 120% ($15,000 / $12,500) of her goal, and she might be paid 140% of her target incentive or $1,400. This provides a payout that is determined by the individual’s ability to meet and exceed the goal that management has set for him/her. Next month, when management decides that Sally might do a better job managing one of Joe’s accounts, Joe’s goal would be reduced and Sally’s would be increased, to reflect this shift in accounts. Each of their incentive targets would still be $1,000 for 100% of goal attainment. Management can make this decision purely based on what is in the best interest of the customer and the company, without fear that this kind of change is taking pay from Joe and “giving it” to Sally. Instead, the discussion is entirely about who is best suited to manage and grow this particular account.

For those of you who may feel that the pure goal-based approach is not quite right for your business, or it’s too much change to take in one step, there is the comforting fact that there are millions of different ways to design incentive plans. One of these options is to use a goal-based commission, where the commission rate increases when the individual’s goal is attained. This provides a blend of reward for volume and reward for goal-attainment. Another option is to divide the incentive into two (or three) elements, one of which is paid using a commission mechanic, and the other of which is paid using a goal-based mechanic. Some companies elect to transition by using the goal-based mechanic on a lesser-weighted team measure, and the commission mechanic on a more heavily weighted individual measure. The possibilities are truly endless, and companies that are moving beyond the traditional broker method for compensating their employees are finding the answers to some of their most vexing compensation problems.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com

1. Is the pay mix changing at all? Often more frequent payments can be a way to alleviate some of the sting of a change to a more variable pay mix (if you have had to make reductions in base salary, increasing the frequency of incentive payments can help your reps meet their regular financial obligations).
2. If the pay mix is not changing, what impact will smaller more frequent payments have on your reps’ perception of the incentive program? Will the amount paid still be meaningful or will it get sucked into their regular expense budget and not be as noticeable as a larger lump payment would be?
3. Can your company handle the increased administrative burden of more frequent payments, and what are the limits? Most companies would not find it cost-effective to make daily incentive payments, although I have known some to make weekly payments (against my advice).
4. How will more frequent payments change the reps’ behavior – are there any unintended consequences and can these be alleviated through selection of the appropriate design option?

On point 4, there are typically two choices for performance period when switching to payments that are anything other than annual in frequency: discrete and year-to-date (YTD). In all our examples below we will assume the change is from annual payments to quarterly payments, as per the initial question. However, the same logic could work for monthly payments that are on an annual, semi-annual, or quarterly performance period.

We’ll start with discrete periods first. In this method each incentive payment corresponds with the end of a performance period, and the next payment starts fresh with the next period. There is no carry-over of performance from one period to the next. This type of plan is common in highly transactional, high frequency selling environments where sales are made regularly and there is little ability for the rep to game the timing of sales crediting. If the rep can control when sales are credited, you will likely see peaks and valleys in performance from one period to the next, where reps are pulling or pushing sales to maximize earnings. If your plan has thresholds (that require a minimum performance before payment is earned) and escalators (where payment increases for increased performance) and you are using discrete periods, you are very likely to experience some of this “porpoising” as reps figure out how to get the most bang for each sale. The end result of this behavior is an overall annual performance that may be below target, while the rep has been able to earn above target pay by using the escalators to his/her advantage in high volume periods. If there is little possibility of this behavior, using discrete periods is the most straightforward mathematically and often the most motivating in the short term for the reps.

The most common solution for this problem is to use a YTD mechanic instead. This requires that performance be tracked against a longer performance period and that each payment is calculated against an annual YTD target incentive amount as well. While the mathematics on this can be a bit daunting at first, once reps and managers understand that pay is not “lost” in a bad period, but may be earned back, they quickly see the advantages. In a typical YTD approach, an annual quota is divided into four even amounts as is the annual target incentive. We’ll use $1,000,000 as the annual quota and $10,000 as the annual incentive. A quarterly YTD approach would work as follows:

Q1 Quota: $250,000
Q1 Target Incentive: $2,500

Q2 Quota: $500,000 (Q1 + Q2)
Q2 Target Incentive: $5,000 (Q1 + Q2)

Q3 Quota: $750,000 (Q1, Q2 + Q3)
Q3 Target Incentive: $7,500 (Q1, Q2 + Q3)

Q4 Quota: $1,000,000 (full year)
Q4 Target Incentive: $10,000 (full year incentive)

While there are many ways to arrive at the amount earned as a percentage of target, the common mathematical element critical to the success of a YTD plan is to calculate the percentage of the YTD target incentive earned and then subtract any prior payments already made. This creates the “true-up” which ensures that sales which may fall later in the year still “count” toward the reps overall annual payment. Those who are mathematically astute will quickly see there is a potential for ending the year in arrears using this method. Therefore we recommend capping Q1-Q3 payments at 100% of target, and saving any payments for performance above 100% until the full-year results are in. That way a strong start to the year and weak finish will be less likely to create the need for a rep to “pay back” money already paid.

There are some variations on this approach, which combine different aspects of a discrete plan and a YTD plan. Here are two:

1. Use discrete quarterly periods for payments up to 100% with a year-end bonus that rewards for any full-year performance above 100%. This avoids the need to do the true-up calculation which causes some organizations communication difficulty. It does not, however, eliminate the potential for reps to play with the timing of sales to increasing their earnings, but it reduces it by keeping all the “upside” until the end of the year. As with the traditional YTD approach this also acts as a retention tool for anyone running above 100%. Should they leave prior to year-end they will be walking away from any upside the plan may provide.
2. Software companies sometimes use YTD quotas while paying using a discrete quarterly target incentive. This encourages more balanced performance throughout the year, but puts a pretty high premium on the accuracy of quarterly quotas. If business is steady and/or seasonality is highly predicable, this may be an effective way to get even performance throughout the year (as there is no true-up opportunity, it really does matter more WHEN the sale happens, not just that it happened sometime during the year). There is another advantage to this method in that it puts more emphasis on sales that happen earlier in the year. If a rep can “fill the bucket” as quickly as possible in the year, he/she will have the best chance of being in the “sweet spot” of the plan design (where the escalators are the steepest) for each quarterly payment period. As there is no true-up, there is also no chance of ending the year in arrears. There is, however, the possibility that a rep who starts out slow but ends strong will make less money than a rep who had a very strong start but ended weak. Consider which outcome is better for your business when selecting between the traditional YTD approach and this variation.

Words of caution:
It is common for incentive plans to include hurdles and modifiers. These can become especially challenging when dealing with the traditional YTD plan (using a true up calculation). You must be very cautious to do any modifier calculation AFTER the YTD calculation has been completed and you have the final quarterly payout calculated. Whether the modifier increases or decreases the quarterly payout, you must include the ORIGINAL quarterly amount (prior to modifier) when calculating your next quarter’s YTD payout. If your plan has complex calculations including modifiers, hurdles, and any other type of linkage between elements (especially if they are using different performance periods), you should make the choice to use a YTD calculation very cautiously. If it is important to your business to go this direction, you may need to change some of the other elements of your plan design to ease the calculation complexity and ensure your reps have a clear understanding of how they will get paid.

If sales cycles are 1 to 3 months, then consider a quarterly payout. For sales cycles of 3 to 12 months you should probably consider an annual plan paid quarterly based on year to date performance.

If sales cycles are longer than 12 months you can get into a trickier situation. If a typical sales person closes many deals per year, even though the sales cycle is long you might use a quarterly year-to-date payout as well. However, if the sales cycle is very long (> 12 months) and if there are few deals per year (less than 10 or so), you may need to consider other options. Here are two:

1. A more base-rich pay mix with a “kill bonus” approach: The sales person has a base pay that is close to their market value, and receives a handsome “bonus” payout upon closing one of those large deals – either a small percent of the deal value (commission) or a fixed amount per deal (bonus), depending on how much influence they have over deal value. If they strongly influence deal size or deal value (margin), then a percent of the margin expected from the deal can be a good measure. If not, a fixed bonus may be a better approach. This is most appropriate for large deal “hunter” roles.
2. A commission on revenue or margin payable as the revenue is recognized: This will be paid out over the first year, first two or three years, or the “life” of the deal. This will have the effect of creating an annuity stream for the future, will help to retain good talent, and may make it less appropriate to continue to pay that high base once a few deals are landed. This is appropriate for sales roles in which an ongoing account management (“farming”) emphasis is expected. If this is your situation you should consider the early-on high base as more of a non-recoverable draw against earnings which will disappear after the first 18 to 24 months in the job.

Some technology companies pay quarterly for results that quarter. In this case, each quarter stands alone and there is no concept of a draw.

Some pay quarterly as long as year-to-date results meet certain criteria – this version could be considered a draw in the sense that the plan design is an annual plan with a quarterly payout mechanism. Usually any accelerated over-target payout is reserved for year-end when the total year results are available and overall over-performance can be verified.

I have assumed here that you are not asking about sales compensation plans, where draws are more common. These are generally offered in roles where sales people have a smaller portion of their total target compensation in a fixed base (less than 60% or so), and a highly seasonal business. For these roles, the draw is needed to keep cash flow stable during the “off season.”

However, if you want to motivate and reward for results they themselves are capable of generating, giving them meaningful at-risk pay to “penalize” those who don’t deliver and exciting upside to reward those who really ring the bell, then you might want to consider tying their variable pay more directly to results they can personally control.

A more typical sales management variable pay plan would tie a fixed value incentive opportunity to achieving a sales or gross margin goal, with:

• No payout for performance before some threshold value (50% – 90% of goal depending on goal setting accuracy and company/market maturity),
• Increasing (but linear) payout between the threshold and the goal,
• Accelerated payout (more $/percentage point of goal achieved) for over-goal performance, and
• Deceleration or a cap at a very high level of performance (110% – 150% of goal, again depending on goal setting accuracy and company/market maturity).

1. Pay mix and upside: Selling to new clients generally relies more on the initiative, skill and creativity of the sales person than does managing existing clients. Existing clients continue to buy partly because sales people do their jobs well, and also very much because the company has delivered value to them in the past. What this means for comp plan design is that the business developer generally has more at-risk pay as a percent of Target Total Compensation than the account manager. The business developer also generally has more upside (more acceleration above target performance) than the account manager.
2. Measures: For account managers, measures typically include both revenue and some measure of account (/territory) profit contribution – maybe gross margin or gross profit. For business developers, it is less common to emphasize a measure of profitability as long as it is within acceptable bounds. The message is that the business developer gets the new customers in, then the account manager works over time to grow the value of the relationship to both your company and the customer.
3. Incentive form: Depending on the industry you’re in, the market position of the company, and your compensation philosophy, you may be using a commission type incentive (percent of sales, percent of margin, etc.) or a bonus-type incentive (fixed dollar payout for achieving the assigned goal, less for less, more for more). Bonus type incentives are more common in account management roles, and commission type incentives are more common in business development roles.
4. Payout frequency: Because the business developer has less fixed pay and is more personally and immediately accountable for results, they are often paid more frequently than the account manager. The business developer may be paid monthly, for example, while the account manager is paid quarterly.